Two years have passed since the Great Crash of September-October 2008.The 2008 Crash is best seen as a Hayekian recession caused by “easy money” with the Fisherian consequences of a “balance-sheet recession”. It has been claimed that, once the central bank has cut interest rates close to zero, it would face a Keynesian liquidity trap, and the only recourse to keep up aggregate demand is through massive fiscal spending. However, the argument is not correct, writes Deepak Lal in Business Standard.

It is now widely accepted that biographies of great writers are interesting only insofar as they illuminate their work, and to do this effectively requires a discursiveness on the part of the biographer which alone would tell you what turned the writer on to do the work she did in her lifetime.

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Possibly because An Inquiry into the Nature and Causes of the Wealth of Nations (1776) was multidisciplinary and broadened the study that Adam Smith began in The Theory of Moral Sentiments nearly 20 years earlier in 1759, there has been no unanimity on what precisely his influence was based on. Was it because he was the masterly advocate of laissez faire? That he was opposed to every effort by a government to control the self-interested activities of individual economic actors, so granting the licence to greed and other vices, and malpractices, and quite content that markets should be the battlefield from which the most oppressive combatants would emerge as “victors”?

Should the “Invisible Hand” of the market decide? What does his statement that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their self-interest” really mean? Quite apart from the fact that these iconic statements can be interpreted in different ways, there is also the sad fact that not many economists have read The Wealth of Nations as a whole; they have snatched bits and pieces and drawn their half-baked conclusions that we have accepted as the truth because they came down to us from experts.

The basic question we need to ask is whether Smith wholly approved of a society in which man’s economic activities are actuated by self-interest. In his Theory of Moral Sentiments, Smith had identified human perfection with virtue and virtue of the highest order with altruism. Phillipson’s biography provides a balanced picture of Adam Smith’s work against the background of the Scottish Enlightenment and the influence of his philosopher friend, David Hume.

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By maintaining a stable Constitution, especially if courts are independent and markets are free, a commercial society enhances individual freedom, which is a precondition of moral choice. Competition in markets compels individuals to exercise self-control, prudence and industriousness, virtues which, though imperfect, are attainable by ordinary people. Although these virtues promote the well-being of the individual rather than the good of others, they unintentionally benefit others. Phillipson suggests that Smith’s practical aim throughout the Theory of Moral Sentiments is “designing the decent society”.

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Smith’s practical proposals aimed to improve both material and moral conditions of people. Because his books have not been read as a whole, today’s social scientists and proponents of public policy have ignored or distorted his outlook. Above all, they have ignored Smith’s constant theme that unintended consequences of good intentions are often bad. The biography sums up Smith’s intellectual contribution and for this alone, the book needs to be read, and not just by economists.